Capital Markets Union in Europe: Why Other Unions Must Lead the Way

Abstract

Government bond markets in the Euro Area are highly fragmented causing further fragmentation in bond and equity markets. Capital Markets Union with fully integrated capital markets across member countries can only work when the status of member country sovereign bonds as risk-free assets is restored. Banking Union and fiscal union are both required for this outcome. However, the Banking Union remains an unfinished project without an European deposit insurance framework and there is little consensus at the moment for a fiscal union in the Euro Area. It appears thus that the fate of the Capital Markets Union solely rests with the European Central Bank in the near to medium term.